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Britain Reaches for the Coronavirus Bazooka

Marcus Ashworth

(Bloomberg Opinion) -- Governments’ economic policy response to the coronavirus has been a mess of one-off rate cuts, a little bit of liquidity provision and a bunch of disparate spending promises. A coordinated fiscal and monetary effort is sorely needed — if not at the supranational level (which would be ideal), then at least at the individual country level. More important still will be nimble short-term stimulus and cash flow measures to prevent companies from going bust and the economy from seizing up.

Some people might think Brexit Britain would be the last place to show the world how to manage this stuff. But, as my Bloomberg News colleague David Goodman highlighted this week, the country is starting to look like a test case for joined-up economic action on tackling the outbreak’s financial impact. Just look at Wednesday morning’s shock 50bps cut to interest rates by the Bank of England, and its package of other stimulus measures. Unchained from the rest of the European Union, which has been leaden-footed in its coronavirus response so far, this is the moment for Boris Johnson’s Tory government to show the benefits of a Treasury and a central bank that are in lockstep.

The U.K. Budget on Wednesday will also see the long-expected unveiling of the new government’s fiscal strategy, with extra impetus provided by Covid-19. It has already been augmented by Wednesday morning’s BOE action. We may also see at some point a series of measures where the central bank and the finance ministry work together to ensure stability.

A fiscal bazooka was already expected after the government’s previous fiscal rules were relaxed by one percentage point to allow a budget deficit of up to 3% of gross domestic product, creating room for 100 billion pounds ($130 billion) of investment spending over the next five years. This might be relaxed even further and matched with up to 10 billion pounds of regular and emergency spending and tax cut measures.

It helps that both Chancellor of the Exchequer Rishi Sunak and incoming BOE Governor Andrew Bailey (he joins on March 16, but has already been making his presence felt) are new kids on the block, so they’re open to novel approaches. Bailey is moving across from the Financial Conduct Authority, and he was heavily involved in the BOE’s response to the global financial crisis when he worked there previously.

Mervyn King, a former BOE governor, said on Monday that more targeted measures were needed. He was right about that. A pause on people’s tax bills, and on mortgage and loan payments for households and corporates, would be wise. Royal Bank of Scotland Group Plc has already said it will waive mortgage payments for three months for those impacted by the virus. Italy is moving in this direction, as is Germany. But there’s yet to be a unified EU response; the silence from Brussels is deafening.

Payment holidays won’t be enough, though. The BOE’s Term Funding Scheme — a package of cheap loans to banks — has been reopened and targeted at lending to small- and medium-sized companies. Similarly, there has been a temporary relaxation of the “counter-cyclical capital buffer,” which determines how much capital banks need to hold. That will free up a lot of lending firepower.

There’s no time to set up new institutions. The banking system is the most efficient transmission mechanism to the real economy. The central bank will in effect be an agent for additional fiscal stimulus from the government. This will blur its formal monetary role but it could set a vital precedent without compromising its independence.

Britain has the chance to create a template for governments and central banks working together. The interest rate cut was the inevitable first move. But the other steps are the really interesting ones.

(This column was updated with details of BOE interest rate cut.)

To contact the author of this story: Marcus Ashworth at mashworth4@bloomberg.net

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

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